Pennsylvania Payment and Performance Bonds

What are Pennsylvania payment and performance bonds?

Pennsylvania payment and performance bonds are two contract surety bonds that a contractor posts after winning a construction job. The performance bond guarantees that the contractor will perform the contract according to its plans, specifications and conditions. The payment bond guarantees that subcontractors, laborers and suppliers who furnish labor or materials to the job will be paid.

Under Pennsylvania's Public Works Contractors' Bond Law of 1967 and the Commonwealth Procurement Code, public owners must require both bonds, each equal to 100% of the contract amount, on most public construction contracts. Each bond involves three parties: the contractor (the principal), the surety that issues the bond, and the project owner (the obligee), such as a state agency, county, municipality, school district, municipal authority or private owner. The two bonds are usually issued together for a single premium.

Key facts

Who needs Pennsylvania payment and performance bonds?

Nearly every contractor that wins a Pennsylvania public construction contract must post payment and performance bonds. That includes work for Commonwealth agencies such as the Department of General Services and PennDOT, state-related universities, counties, cities, boroughs, townships, school districts, intermediate units, career and technical schools, and municipal authorities such as water, sewer, parking and transit authorities. Because Pennsylvania's mechanics' lien law doesn't reach public property, the payment bond is the main protection for unpaid subcontractors and suppliers on public jobs.

Private owners, lenders and general contractors also require these bonds by contract on commercial, multifamily and institutional work, and generals often require them from their larger subcontractors. The two bonds protect different people:

The bid documents control each project. Owners can require security on contracts below the statutory thresholds, and private owners set their own amounts and forms. Contractors and agents should read the solicitation before quoting.

What makes Pennsylvania's bonds different

Pennsylvania's bond rules differ from most states in a few ways agents and contractors should know before quoting.

• The thresholds are among the lowest in the country. Local public owners must require 100% performance and payment security on contracts over $10,000, and other public bodies covered by the Bond Law must require bonds over $5,000. Many states don't require bonds until $100,000 or more.
• The Separations Act multiplies the bonds. On public building projects over $4,000, owners must bid and award separate prime contracts for general construction, plumbing, HVAC and electrical work. Each prime contractor signs directly with the owner and posts its own bonds, so trade contractors need bonding capacity of their own. Bills to raise the threshold or repeal the Act have been introduced but not passed.
• Letters of credit and escrow accounts can replace bonds. Counties, municipalities, school districts and authorities may accept an irrevocable letter of credit or a restrictive or escrow account at a federal or state chartered lending institution instead of a surety bond, as long as it equals 100% of the contract amount. Since 2020, local owners can no longer accept lesser forms of security.
• The suit clock starts after a 90-day wait. A payment bond claimant can't sue until 90 days after its last labor or delivery. Pennsylvania's Supreme Court has held that the one-year limitations period runs from the end of that waiting period, so claimants generally have about 15 months from last furnishing to file suit.
• Only second-tier claimants need notice. A subcontractor or supplier with a direct contract with the prime contractor needs no notice before suing. A claimant who contracted only with a subcontractor must give the prime written notice within 90 days of its last work.
• The performance bond protects only the owner. By statute, the performance bond is solely for the protection of the contracting body. Subcontractors and suppliers must look to the payment bond.
• Retainage drops at 50% completion. Public owners may retain up to 10% of each payment until the job is 50% complete. At that point, if progress is satisfactory, they must release half of the retainage held and withhold no more than 5% of later payments. DGS contracts use lower limits of 6% and 3%.
• Subs must be paid within 14 days. On public and private jobs, contractors must pay subcontractors their share within 14 days of receiving payment, with interest on late payments. Pay-if-paid clauses can be enforced only if they clearly make owner payment a condition precedent.

Bond requirements by project owner

Pennsylvania's bond rules depend on who owns the project. Commonwealth agencies follow the Procurement Code, local owners follow the Bond Law, and the Separations Act decides how many prime contracts need bonds on public buildings.

Bid security on Pennsylvania public work is set in each solicitation, and 10% of the bid is common. Owners may require security on contracts below the statutory thresholds. Check the bid documents for each project.

Circle Surety's contract bond program gives contractors an instant program approval. Bid, performance and payment bonds for individual jobs are then issued under that approval in minutes. Agents can set up contract bond capacity for a client once and bond each new Pennsylvania job as it comes, including separate prime contracts under the Separations Act.

How much do Pennsylvania payment and performance bonds cost?

Pennsylvania payment and performance bond premiums are typically calculated on a sliding scale, where the rate steps down as the contract amount grows. In the example below, the rate typically starts at 3% on the first $100,000 of the contract price and steps down to 1% on the portion over $2,500,000, though the tiers and rates usually vary by surety.

One premium covers both bonds together; the payment bond is usually included at no added cost when it is written with the performance bond. The rates below are a hypothetical example; the actual rate can only be determined after a completed application is received. Premium rates by contract amount:

Estimated one-time premiums for common contract amounts:

Estimates cover the performance and payment bonds together for the life of the contract; minimum premiums vary by surety. Change orders that raise the contract price raise the premium. Contracts over $2,000,000 require additional financial information.

Circle Surety can provide instant quotes for these and many other bonds through our online portal.

How to get Pennsylvania payment and performance bonds

1. Read the bid documents. Confirm the bond amounts, the owner's bond forms and whether the project is split into separate prime contracts under the Separations Act.
2. Line up the bid bond. Most Pennsylvania public owners require bid security, commonly 10% of the bid. Get the bid bond before bid day.
3. Apply online. Fill out the short form below, as the contractor or on your client's behalf. A soft credit check is required to determine program approval and the final premium.
4. Gather the contract details. After award, provide the contract amount, the owner's name, the contract or project number and the contractor's exact legal name as it appears on the contract.
5. Sign and pay. All contract bonds require a general indemnity agreement signed by the company and its owners. Once it is signed and the premium is paid, the bonds are issued with the surety's power of attorney attached, usually in minutes.
6. Deliver the bonds to the owner. Submit the original performance and payment bonds before the contract is awarded or signed. The bonds are filed in the office of the contracting body.
7. Report change orders. Notify the surety of change orders that increase the contract amount so the bond amount and premium can be adjusted.

Requirement details

Bond forms and filing

Pennsylvania doesn't prescribe a single statewide bond form. Each contracting body uses its own forms, and bonds are filed in the office of the contracting body that awarded the contract. Bonds on Commonwealth agency contracts are payable to the Commonwealth; other bonds are payable to the local contracting body. The payment bond covers public utility services and reasonable equipment rental for the time the equipment is actually used at the site.

Surety and alternative security

Bonds must be written by one or more surety companies legally authorized to do business in Pennsylvania. Local contracting bodies may instead accept an irrevocable letter of credit or a restrictive or escrow account at a federal or Commonwealth chartered lending institution, chosen by the contractor and acceptable to the owner, as long as it equals 100% of the contract amount.

When bonds must be in place

The prime contractor must furnish the bonds before the contract is awarded to it. Many local owners set a deadline in their bid documents, such as 10 to 20 days after notice of award, and can award the job to the next bidder if bonds aren't delivered on time.

Separations Act and multiple primes

For public buildings costing more than $4,000, the owner must prepare separate specifications and award separate contracts for general construction, plumbing, heating and ventilating, and electrical work. The owner, not a general contractor, coordinates the prime contractors. Each prime posts its own performance and payment bonds, which makes bonding capacity a requirement for mechanical and electrical contractors that would be subcontractors in other states.

Retainage and prompt payment

Public owners may retain up to 10% of each payment until the contract is 50% complete, then release half of the retainage held and withhold no more than 5% of later payments if progress is satisfactory. DGS contracts are limited to 6% and 3%. Contractors must pay subcontractors within 14 days of receiving payment, and the architect or engineer must inspect the work within 30 days of the final payment request.

Private projects and mechanics' liens

Pennsylvania doesn't require bonds on private projects, but owners and lenders often require them by contract. Private jobs are covered by the Mechanics' Lien Law of 1963 and the Contractor and Subcontractor Payment Act, which requires payment down the chain within 14 days and release of retainage within 30 days of final acceptance. A recorded lien can be discharged by posting a bond or other security, which moves the claim from the property to the security.

Claims: what the bonds cover

• Who can claim on the performance bond: only the contracting body named as obligee, after declaring the contractor in default
• Who can claim on the payment bond: anyone who supplied labor or materials to the prime contractor or a subcontractor and was not paid in full, including equipment rental and public utility services used on the job
• Direct claimants: a subcontractor or supplier with a contract with the prime contractor may sue on the bond once 90 days have passed since its last labor or delivery, with no prior notice required
• Notice for second-tier claimants: a claimant with a contract only with a subcontractor must give the prime contractor written notice within 90 days of its last labor or delivery, stating the amount claimed and the party it supplied. Notice goes by registered or certified mail to the prime's regular office, or by personal service
• Deadline: suit must be filed within one year after the 90-day waiting period ends, or about 15 months after the claimant's last labor or delivery
• Copy of the bond: an unpaid claimant who submits an affidavit can get a certified copy of the payment bond and the contract from the contracting body for a fee
• Limits: total claims can't exceed the penal sum of the bond
• Your obligation: a bond isn't insurance for the contractor. If the surety pays a claim, the contractor and its indemnitors must repay it. Agents should make this clear to clients before issuance

Sources

• Public Works Contractors' Bond Law of 1967 (Act 385)
• Act 86 of 2020 — Financial security on local public works
• 62 Pa.C.S. § 903 — Contract performance security and payment bonds
• 62 Pa.C.S. § 3933 — Contractors' and subcontractors' payment obligations
• DGS Procurement Handbook — Contract payments and retainage
• 71 P.S. § 1618 — Separations Act
• Centre Concrete Co. v. AGI, Inc. — One-year suit period after 90-day wait